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training_data/relevant/text/36912a05b4958941f6e74aa7311d323c8a5b94f1df45b6e74cae4b9942d9f1a6.txt

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+250  •   The Intelligent Option Investor
+The graphic conventions are a little different, but both diagrams show 
+the acceptance of a narrow band of downside exposure offset by a bound-
+less gain of upside exposure. The area below the protective put’s strike price 
+shows that economic exposure has been neutralized, and the area below 
+the ITM call shows no economic exposure. The pictures are slightly differ-
+ent, but the economic impact is the same.
+The objective of a protective put is obvious—allow yourself the 
+economic benefits from gaining upside exposure while shielding yourself 
+from the economic harm of accepting downside exposure. The problem is 
+that this protection comes at a price. I will provide more infromation about 
+this in the next section.
+Execution
+Everyone understands the concept of protective puts—it’s just like the 
+home insurance you buy every year to insure your property against dam-
+age. If you buy an OTM protective put (let’s say one struck at 90 percent of 
+the current market price of the stock), the exposed amount from the stock 
+price down to the put strike can be thought of as your “deductible” on your 
+home insurance policy. The premium you pay for your put option can be 
+thought of as the “premium” you pay on your home insurance policy.
+Okay—let’s go shopping for stock insurance. Apple (AAPL) is trad-
+ing for $452.53 today, so I’ll price both ATM and OTM put insurance for 
+these shares with an expiration of 261 days in the future. I’ll also annualize 
+that rate.
+Strike ($) “Deductible” ($) “Premium” ($)
+Premium as 
+Percent of 
+Stock Price
+Annualized 
+Premium (%)
+450 2.53 40.95 9.1 12.9
+405 47.53 20.70 4.6 6.5
+360 92.53 8.80 1.9 2.7
+Now, given these rates and assuming that you are insuring a $500,000 
+house, the following table shows what equivalent deductibles, annual 
+premiums, and total liability to a home owner would be for deductibles 
+equivalent to the strike prices I’ve picked for Apple: